When it comes to the part of your divorce that represents the most substantial portion of your net worth, the immediate asset that our mind may consider is our home. From an emotional standpoint, our home is sometimes our largest asset, but it almost always is the asset that tugs at our heartstrings and makes us feel the most emotion. It’s the place where so many memories, good and bad, likely occurred. However, if you are going through a divorce case you need to consider whether this is the reality of your situation.
For many of you reading this blog post, it may not be true. Rather, it may be that your retirement savings in various forms represent the most substantial part of your asset collection and the part of your community estate in a divorce scenario that would stand to be divided in the most significant way. On top of this, your retirement savings may be the most important portion of your assets not only from a dollars and cents perspective but also when it comes to your day-to-day life.
If you are entering or are already in your golden years, then your retirement savings may be your lifeline and the only source of income you have. On the other hand, if you have been a stay-at-home parent and spouse for most of your marriage then you may have been planning to rely upon your spouse's retirement savings in your golden years. This would be understandable. However, now that you are looking at a divorce case head you need to be aware of how to approach this subject intelligently.
In today's blog post from the Law Office of Bryan Fagan, we will discuss how to approach the division of a retirement account in your Texas divorce from a detailed perspective. If at the end of today's blog post, you have any questions about the material that we shared today please do not hesitate to contact our office. We offer free-of-charge consultations six days a week in person, over the phone, and via video. These consultations are a great way for you to learn more about the world of Texas family law as well as about how your family circumstances may be impacted by the filing of a divorce or child custody case.
Your hard work means a lot- so pay attention and be intentional
Without a doubt, if you have amassed a substantial amount of retirement savings then you have done so through hard work. Saving for retirement is not one of the things where a person can roll their eyes and say that you ripped someone off to get that wealthy. Rather, retirement savings are almost always a reflection of hard work performed well over a long period. You should take pride in the work that you have turned in over the years and what it has meant to your current and future financial stability.
With that said, you should approach the subject of retirement division as one where you need to be incredibly intentional about how you approach its division. You cannot wander into a division of your retirement benefits and then expect to wander out in one piece. You need to be able to have a plan, stick to it and then see it to fruition. Circumstances change in divorce all the time. This means you may have to adjust certain parts of your plan, but you should at least understand what is at stake and how to manage the division of your retirement- if that has to occur at all.
Community property and retirement savings
Texas is a community property state. If you have spent any amount of time reading the blogs on this website, then you know that. Community property simply refers to the method of how marital property is classified in Texas and how ultimately a family court judge can divide that property if asked. A presumption attaches to all property at the time of your divorce that it is a part of the community estate. The presumption can be rebutted with evidence showing that the property belongs to you separately (or your spouse). However, depending upon the length of your marriage most if not all of your property may be community and thus divisible in your divorce.
If you want to be able to show that your retirement account is part of your separate estate, then you have some work to do. Remember that you must overcome the presumption that the property in question is part of the community estate. This means having evidence to show that the retirement savings were either acquired before your marriage or during your marriage by gift or inheritance. These are the primary ways to show that a sum of money, retirement or not, is part of your separate estate rather than the community estate.
However, I would expect that for most of you reading this blog post that the money in your retirement accounts is probably community property and thus can be divided in your divorce. This should cause you to start thinking about the consequences that the potential division of your retirement savings can have on your life. The thing that you need to consider is that your future self will be impacted more, most likely, than your current self when it comes to the division of your retirement benefits.
What are the different types of retirement accounts that may be a part of your divorce?
There are so many different types of retirement accounts that may be a part of your life and that of your spouse. 401(k), Individual Retirement Accounts (IRA), Thrift Savings Plans (TSP), Pensions, and the list can go on and on. There are many ways to save for retirement in our country and hopefully, you and your spouse have been able to take advantage of at least one of those.
Even though there are so many kinds of retirement plans available, there are only two general categories of retirement plans that you may have taken advantage of during your working years. The first is a defined contribution account and the second is a defined benefit account. We will discuss each of those accounts in detail here and go through how each type of plan can be significant to your Texas divorce case.
A defined contribution account is made up of assets that you or your spouse contributed to during your working lives. The money contributed was income from your employer or earned income that you contributed yourself outside your place of employment. The value of the defined contribution account is based on the amount of money that you have contributed in addition to the growth of that money in terms of interest. The older you get, if the money is invested well then, the vast majority of your defined contribution account would be growth on the principle that you invested. The most common types of defined contribution accounts are 401Ks and Individual Retirement Accounts (IRA).
The other type of retirement account is a defined benefit account. A defined benefit account will provide the person named on the account with a fixed amount of money for a specific period during their retirement years. There is usually an equation that is utilized to determine the amount of the benefit that you or your spouse would receive upon retirement. One of the most widely used types of defined benefit accounts is a pension. Pensions were the primary way that Americans saved for retirement up until a generation ago. Now pensions are mostly utilized by government employers, unions, and a few private sector employers.
How is the portion of the defined contribution account subject to division determined?
The rule of thumb when it comes to defined contribution retirement accounts is that any contribution that is made during your marriage is counted as community property. The growth in the contributions that occurred during your marriage is also considered to be community property and is thus divisible. What this should tell you is that if you contributed all the money to your account during your marriage then the entirety of that account is subject to division in the divorce. For those of you who are entering your golden years or are already there, this should give you a reason for pause. How you handle this subject related to your divorce is going to be very important.
On the other hand, you may have started contributing to your defined contribution plan before your marriage. This presents a situation where you and your attorney will need to calculate the portion of your retirement account that is community property and the portion that is your separate property. The most straightforward way to do this is to take the current value of the account and then subtract the value of the account on the day that you got married. This will help you to determine what part of the account is community property and what part is separate property.
Remember, however, that the presumption in a divorce is that all property in existence at the time of your divorce is community property. You would need to come up with evidence to show that a portion of your retirement savings is your separate property. If you started contributing to this account, many years ago then coming up with evidence can be difficult. However, if you started contributing to the account recently then the magic of the internet can also act as a good record keeper for you. Either way, you should be prepared to show evidence both to your spouse- and potentially to a judge.
How is the portion of the defined benefit account subject to division determined?
The above discussion regarding how to divide up a defined contribution plan is child's play compared to how a court would look to calculate how your defined benefit plan should be divided. The same general rule applies, however, that we saw above: if we assume that all of your "contributions" to the benefit plan were made during your marriage then the entirety of the defined benefit plan is subject to a just and right division during the divorce. This is all calculated as of the time of your divorce.
However, if some of the "contributions" were made through your employment before your marriage began then you would need to utilize a formula to figure out what portion of the defined benefit account is community property and subject to division in your divorce.
Here is how that formula works. You would take the total number of months that you worked for your employer during your marriage and then divide that number by the total number of months that you worked, overall. Doing this would give you the percentage of the defined benefit that is subject to a just and right division at the time of your divorce.
Here is an example of the above calculation spelled out in plain language. Suppose that you worked for 60 months (5 years) for Company A while you were married. However, you worked for an additional 24 months (2 years) for Company A before your marriage. This means you would take 60 months and divide that by 84 months to arrive at the percentage of your pension that is subject to division in your divorce. In this case, 71.4% of the pension would be subject to division in the divorce.
Again, the way that most employers calculate your actual benefit at retirement is based on years of service and your salary earned during your working life. Another factor to consider in this regard is that your pension may not be vested at the time of your divorce. However, the plan must still be divided. Consider also that if you are a younger person then your payments under a defined benefit plan may not be due until much later in your life. To calculate the community property value of the account something may have to be done to discount the value of the account given that it may be decades until either of you can realize any gain on these funds.
How, mechanically, is a retirement account divided as a result of your divorce?
Once you and your spouse determine how to divide up the retirement plan, the next step will be to figure out how to go about doing the dividing. It is not as simple as calling the retirement plan or your employer and asking for a check. Rather, the process will depend upon the specific plan in question as well as the policies of the individual plan in question. You should start reviewing this language or looking at it for the first time to familiarize yourself with what will be required of you.
An IRA is a common method of saving for retirement. There are two ways to divide up an IRA in your divorce. The first is to cash out the account and then divide the money in a way that conforms to your settlement or the orders of a judge. This, however, opens you up to possible tax implications and almost certainly will open you up to a penalty for early withdrawal on the account unless you are older than 59.5 years old.
The better way to divide up the account is to do a direct transfer rollover into a new IRA. Once a check is cut by the financial institution or broker the taxes and penalty that we were discussing a moment ago come into play.
For a 401K, you should speak to your attorney about a Qualified Domestic Relations Order and what that can mean for your case. A Qualified Domestic Relations Order will provide instructions to the retirement plan administrator about how to divide up the 401K. You should check with your plan administrator in advance to determine what required language needs to be included in the QDRO to make the division process as seamless as possible. The last thing you want to do is make a mistake and put yourself in a position where the plan administrator cannot divide up the account. Being in that position once a divorce is done and over with can be a helpless feeling.
Rather, proper planning can position you well for this stage of your case. The ideal situation is to have the QDRO completed while your Final Decree of Divorce is submitted to the judge at a prove-up hearing. Having the judge sign off on all these documents at one time is an efficient use of your time. It will help you to avoid problems and generally complete your case quicker and easier.
Questions about the material contained in today’s blog post? Contact the Law Office of Bryan Fagan
If you have any questions about the material contained in today’s blog post, please do not hesitate to contact the Law Office of Bryan Fagan. Our licensed family law attorneys offer free of charge consultations six days a week in person, over the phone, and via video. These consultations are a great way for you to learn more about the world of Texas family law as well as about how your family's circumstances may be impacted by the filing of a divorce or child custody case.